Treasury's Janet Yellen rains on Jay Powell's parade

Published Thu, Mar 23 20239:08 AM EDTUpdated Thu, Mar 23 20232:35 PM EDT

It was all going so well. Federal Reserve Chairman Jerome Powell 's press conference Wednesday threaded the needle almost perfectly. Nothing explicit that the Fed was pausing, but the language in the Federal Open Market Committee statement was a change. "Additional policy firming may be appropriate" is a pretty wimpy way to say it may hike again someday, a big change from the last meeting when the Fed said "ongoing increases in the target range will be appropriate." Then in the press conference after the Fed raised rates a quarter point, Powell explicitly acknowledged the effect of the banking crisis on rate hikes: "Before the recent events, we were clearly on track to continue ongoing rate hikes. … The events of the last two weeks are likely to result in some tightening in credit conditions." That's not a pause, but it's pretty close. Markets seemed happy. By the time Powell ended the press conference around 3:15 p.m. ET, the S & P 500 was essentially flat. But shortly after, it started a descent straight down, ending the day lower by 65 points. Banks in particular sold off. What happened? Janet Yellen happened. Just as the Powell press conference was winding down, Yellen was testifying at a hearing of a U.S. Senate Appropriations subcommittee, where lawmakers posed questions about the U.S. administration's efforts to protect depositors and prevent bank runs. Both Yellen and Powell have gone to great lengths to say deposits are safe and, by so doing, are implying an implicit backstop for deposits. The day before, at a speech to the American Bankers Association, Yellen said in the Q & A, "We are ready and prepared to take the steps that are necessary to ensure depositors that the banking system and their deposits are safe." Powell, in his press conference, said "I think depositors should assume that their deposits are safe." But in her testimony Wednesday, Yellen said the Federal Deposit Insurance Corp. was not considering providing "blanket insurance" for all banking deposits. "I have not considered or discussed anything having to do with blanket insurance or guarantees of deposits," she said. On one level, that is not surprising. Everyone knows that changing the deposit insurance level (currently $250,000) would require an act of Congress. No matter. Bank stocks, only modestly weaker while Powell was speaking, tanked and were the big losers for the day. The S & P Bank ETF was down more than 3%. There is obviously a difference between an implicit and explicit backstop of deposits. The "implicit" promise does not seem to be satisfactory. Fortunately, there are congressional hearings next week to consider explicitly expanding deposit insurance, which was last raised from $100,000 in 2008. Despite the moral hazard this could create, it's clear the market wants that explicit guarantee.